Effective August 25, 2022, the Department of Defense ("DoD") issued an interim rule requiring DoD contractors and subcontractors to disclose whether they have one or more individuals performing work in the People's Republic of China ("PRC"). The rule implements a requirement of the FY 2022 National Defense Authorization Act. The DoD determined that "urgent and compelling reasons" exist to issue this disclosure requirement without public comment in order to "mitigate the risk associated with performance of DoD contracts and subcontracts at facilities located in the [PRC]." Performance of DoD contracts and subcontracts in the PRC "may provide opportunities for that nation to gather sensitive information," which is a matter of national security. Therefore, DoD contractors and subcontractors must disclose and make the DoD aware of "the entities, contracts, and subcontracts that are exposed to such risks, so that mitigation strategies can be implemented."
However, this rule would seem to have a limited effect on the defense industrial base; the rule notes that procurement data from the Federal Procurement Data System showed that during the past three years, no awards met the covered contract criteria, excluding commercial items described below.
The interim rule implements this requirement through the addition of contract clauses in the Defense Federal Acquisition Regulation Supplement ("DFARS"): DFARS 252.225-7057, "Preaward Disclosure of Employment of Individuals Who Work in the People's Republic of China," and DFARS 252.225-7058, "Postaward Disclosure of Employment of Individuals Who Work in the People's Republic of China."
Applicability.
The disclosure requirement applies to "covered entities" with "covered contracts."
A covered contract is "any DoD contract or subcontract with a value in excess of $5 million and excludes contracts for commercial items [including commercially available off-the-shelf items]."
A covered entity is "any corporation, company, limited liability, limited partnership, business trust, business association, or other similar entity, including any subsidiary thereof, performing work on a covered contract in the [PRC], including by leasing or owning real property used in the performance of the covered contract in the [PRC]."
Flow Down to Subcontractors.
The rule requires DoD contractors to flow down the disclosure requirement to subcontractors if the subcontract meets the definition of a covered contract.
Content of Disclosures Pre- and Post-Award.
The DFARS clauses prohibit contract awards, extensions, or options to covered entities unless the entities make the required disclosures. The interim rule requires DoD contractors and subcontractors to submit disclosures pre- and post-award.
Under DFARS 252.225–7057, at the time of the offeror's submission on a covered contract, the offeror, which is a covered entity, must disclose:
- The proposed use of workforce on a covered contract or subcontract, if the offeror employs one or more individuals who perform work in the PRC;
- The total number of such individuals who will perform work in the PRC; and
- A description of the physical presence, including street address or addresses, in the PRC where work on the covered contract will be performed.
Under DFARS 252.225–7058, a DoD contractor or subcontractor that is a covered entity must disclose the following postaward of a covered contract during FY23 and 24:
- The total number of such individuals who perform work in the PRC on the covered contracts funded by DoD; and
- A description of the physical presence, including street address or addresses in the PRC, where work on the covered contract is performed.
Waiver.
The interim rule allows for the senior procurement executive ("SPE") to waive the disclosure requirements if the SPE determines that the "disclosure would not be in the national security interests of the United States."
Effect on Defense Contractors.
Because the rule took immediate effect, defense contractors and subcontractors, who qualify as covered entities should be prepared to make the required disclosures in future contracting opportunities such as awards, extensions, and exercises of options.
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